The Financial Tsunami ( FT ) - The Way Forward ( 5 ) - Protection Points the way to Public Poverty

I have mentioned in my article on the FT ( in the conclusion section on page 57 - please hit on the blog title above to reach my website and article ) that should trade Protectionism again raises its ugly head our present crisis could be prolonged to an unacceptable length of time. The P word must be avoided at all costs.

Unfortunately, there appears to be ominous signs of its revival. The Obama economic team has directly accused China of manipulating her currency, the RMB, to gain trade advantages. This is a bad move in that it is both badly timed from the global perspective and it is souring the much needed co-operative atmosphere among all nations to combat the FT in good faith and in unison. Even verbal confrontation at the time of a coordinated fight against the FT is counter productive as well as a distraction from the issue at hand. As the usual case in all human affairs it is misleading and mostly invalid to point to a single cause in the occurrence of any unhappy event. The simple reason for this is the complicated interactions and feedback loops created in all multilateral dealings that make a one-to-one or cause effect analysis quite impossible. Therefore, it is to everyone's advantage to avoid engaging in such a dangerous move especially at the present critical moment. Most global citizens are placing a lot of hope on the historic Obama administration in changing for the better. So, please heed the right advice and ignore the bad ones. With such a high profile announcement it may even create the wrong impression at the start of the Obama administration. I sincerely hope that the accusation concerning currency manipulation is not the prelude to trade retaliation.

On a more positive note, countries with huge trade surpluses like China should utilize her reserves to buy capital or investment items such as passenger aircraft from USA ( as wisely suggested by one of my friends ). Already China is making the right moves in putting forward rebuilding plans for last year's earthquake devastation in the Sichuan Province. The suggestion to buy from USA is not just a move to prop up the US market. It will go much further to help revitalize US consumer confidence that will in turn increase demand for consumer items in which China specializes. It may sound silly to make your customers rich so that they can afford to buy more from you. This is exactly what is actually happening under the proper working of the market economy. The theoretically ideal international trade position between two countries is an exact balance in their mutual trade accounts. This is because the surplus country like China is actually under-utilizing her purchasing power. To buy more capital goods means to acquire a greater potential for future economic growth. On the other hand the deficit country like USA will be faced with a lot of problems related to deficit financing. Thus, it will be seen that the surplus country is always in a better position in terms of control and having more options.

While advocating a theoretical balance of payment position in international trade it is also important to realize that there must be some trade reserve in reality and save it for a rainy day. However, the appropriate amount of reserve is open to question. There is a school of thought that suggests an amount of reserve equal to 18 months of projected recurrent government spending is appropriate. There are no hard and fast rules. The right amount depends entirely on the needs and circumstances of individual countries. The amount of any reserve usually appears to be huge and idle in good times and very often looks inadequate when disasters strike. There are endless factors to consider because of the endless human needs. That is why an apt definition of the discipline of economics is said to be :- " The study of how people meet their unlimited needs by limited means."

On the international front, we should realize the ultimate goal of globalization for a complete free flow of economic resources, human resources and ideas. Only when this ideal position is achieved will the existing global resources be most efficiently utilized. This will help us in our fight against the FT. The only way to attain the above goal is to open up markets and trade on an equal footing for all countries. Politicians will always be under pressure from voters to protect the narrow national interest by imposing trade barriers to protect local employment. Therefore, it is a touch stone or litmus test for leaders of any country in assessing the scope of his or her vision and strength of leadership to see if he or she can do the right thing under heavy political pressure and severe criticism based solely on national interest. It is a defining line between becoming a great statesman and simply remaining as a petty politician.

The amount of appropriate trade reserve to be maintained as a prudent move is open to deliberation but the evils of trade Protectionism and political Isolationism are beyond dispute.
History has time and again taught us by painful lessons such as the Second World War that such undesirable policies will lead to tragic consequences on a global scale. The evils such policies generate must be done away with for good.

The leader of a country may win over voters through trade Protectionism but he or she will ultimately falter because it is a certainty that PROTECTION points the way TO PUBLIC POVERTY. So, we must prevent Protectionism from raising its ugly head again ever.


JKHC.